Affiliate vs. Subsidiary Companies: Definitions, Differences, and Similarities
Usually, when we talk about affiliates here at Tapfiliate, we mean the websites that brands incentivize to promote a brand to their audience.
With this article, we are branching out from our usual definition of the word affiliate to bring you another definition entirely. This article will talk about the corporate definition of the word. Certainly not to be confused with the marketing definition of the word.
Although spelled the same, under different contexts, the word ‘affiliate’ takes on completely different meanings.
When speaking about large-scale companies, you’ll often hear the terms affiliate and subsidiary being used. If you do not know the difference between affiliate companies and subsidiary companies, you run the risk of using the two terms interchangeably. But this would be incorrect.
The two terms, although used in a similar corporate context and spoken about in everyday conversations in the business world, are very different in their definition.
Here’s what we’ll cover
- What are Affiliate Companies?
- What are Subsidiary Companies?
- Affiliate vs. Subsidiary: the Differences and Similarities
- Finishing Words
What are Affiliate Companies?
In this case, ‘affiliate’ doesn’t refer to someone who markets your products or services on your behalf. In commerce, affiliate refers to a company that has a relationship with another.
An affiliate company is one where a parent company owns less than 50% of the shares in the business. In an affiliated company structure, the parent company remains as minority shareholders, which means they have no say in the board of directors, business decisions, or daily operations.
Only giving up a minor portion of their stocks means that there is the opportunity for affiliated companies to have more than one parent company - as long as the total percentage owned by other entities still remains below 50%. The affiliate company must still own the majority of its shares.
The two (or more) companies continue to operate separately.
However, there will be other reasons for companies to enter into this kind of joint venture, such as increasing the efficiency of the parent company’s processes or having greater control over the business chain.
Let’s have a closer look at the advantages of becoming an affiliated parent company:
Market diversification: investing in an affiliate company is a quick way to gain access to new markets without the steep learning curve that usually comes attached to this sort of diversification.
Geographic expansion: entering into a new geographical region can be a huge risk unless you already have a foot in the door via your affiliated company.
Separate brands: you can obtain shares in another company, but keep your two brands separate. Changing your brand can often lead to a lack of customer loyalty.
Investment opportunity: owning a stake in a company entitles you to a share of their returns.
Control the business chain: this depends on whether or not the company you become affiliated with is in your business supply chain or not. If they are, then it is sure to provide you with a competitive advantage.
Increased value: the value of your company, combined with the value of the affiliated company, is almost guaranteed to be greater
Tax benefits: occasionally, the affiliate structure is set up in such a way that the holding company receives tax deductions or fewer tax liabilities
Affiliated companies are two or more companies that are under common ownership by the same parent company or individual shareholder.
A great example of an affiliate company is Kia Motors. Hyundai Motors is the minority shareholder here, and it owns approximately 33% of the share capital. Another example is Bank of America which has many different affiliate companies that it possesses a minor share of, such as Merrill Lynch.
In the majority of cases, most affiliate companies keep their partners under wraps unless it is beneficial for them to let the public know. If their parent company is an industry leader and has a good reputation, then showcasing its name to the public will only increase consumer trust.
What are Subsidiary Companies?
A subsidiary company is a company where the parent (or holding) company owns a major share of the business - with no less than 50% of the equity belonging to them. Being the majority shareholder has a lot of benefits for parent companies as it means that they have a say in business operations, who sits on the board of directors, and the overall business direction.
In some cases, the subsidiary financials appear on the majority shareholder’s financial statements. That is how intertwined these companies become. Although the majority share of the subsidiary company is owned by another, they remain their own distinct legal entity. They are subject to their own tax, liabilities, and governance.
Here’s what you need to do if you want to create a subsidiary:
- Get the existing company to agree to this form of a partnership
- Agree on what business legal structure you want to enforce
- Make sure all the legalities and procedures are in order
- Form the partnership
- Transfer assets to the subsidiary
- Optimize your business operations
If you’re a newbie to business ownership, you may be asking yourself what different business legal structures there are. Well, no need to panic. I am going to take a quick detour from the affiliate vs. subsidiary debate to tell you about five main kinds:
Sole proprietorship: with the subsidiary level of ownership, this isn’t a legal structure you’d opt for, as in this case, there is only one person who is responsible for and in control of the company’s business operations, profits, and debts.
Partnership: this legal structure is a possibility for your subsidiary as it involves two or more people. Partnerships can be further defined as either general partnerships or limited partnerships. In general partnerships, everything is shared equally, but in limited partnerships, one partner controls business operations, and the other provides monetary assets and, in return, receives some of the profits (sound familiar?)
Limited liability company: here, one or more entities own the business (similar to a partnership), the difference being that under this legal structure, they are shielded from personal liability. Meaning if something goes wrong in the business and it wasn’t your fault, you don’t have to pay the penalty. Only the person at fault does.
Corporations: corporations are owned by many entities but remain separate from those entities. Corporations can be broken down into different types, all with a slightly different legal structures: non-profit corporations, closed corporations, C corporations, B corporations, and S corporations.
Cooperative: like many of the other legal structures listed above, cooperatives are also owned by multiple people. However, what makes this structure different from the rest is the fact that the people who own it are also the people it serves.
When it comes to subsidiary companies, the holding company is typically the larger company. Typical subsidiary companies include liability companies and private companies. However, some government-owned companies have also sneaked through into this category.
When it comes to subsidiaries, you get two types:
- An operating subsidiary
- A non-operating subsidiary
Operating subsidiaries have their own brand and identity, whereas non-operating subsidiaries operate under the holding company’s identity.
Subsidiaries of any kind are becoming increasingly common in today’s corporate world.
We can then expand the concept of subsidiary companies to sister companies. Sister companies are when more than one subsidiary company is owned by the same parent company. This is the only connection the two sister companies have. Other than that, they remain completely separate.
More often than not, sister companies are vastly different from one another in terms of the products (or services) they offer and the target audiences to which they market. It is very rare for two sister companies to be in competition with each other. More often than not, they will join forces to become a more powerful entity.
Subsidiaries also offer their holding company other advantages such as decreased regulations, increased earnings, risk reduction, and more tax benefits in the form of tax credits or deductions. Let’s take a closer look at the advantages of becoming a holding company in a subsidiary relationship:
More control: although holding companies don’t have full control here, they have more control than in an affiliate relationship.
Raise capital: you can either use the subsidiary as a means to drive investments for the parent company or use the share of the returns you’re entitled to. In extreme cases, you can even sell off stock.
Save on taxes: when you own a significant proportion of another business, you can file a consolidated tax return without worrying about any losses the subsidiary was incurred.
Easily differentiate brand identities: you can grow your company’s reach without blurring your brand identity. Each subsidiary can be its own identity with its own brand that then has no effect on that of the parent company.
Market diversification: investing in a subsidiary company is a quick way to gain access to new markets without the steep learning curve that usually comes attached to this sort of diversification.
Geographic expansion: entering into a new geographical region can be a huge risk unless you already have a foot in the door via your subsidiary company.
Control the business chain: this depends on whether or not the company you become a subsidiary with is in your business supply chain or not. If they are, then it is sure to provide you with a competitive advantage.
And those advantages are added on to the advantages of an affiliated company, which subsidiaries are also partial to.
A very well-known example of a subsidiary company is Instagram. Facebook acquired Instagram in 2012, and they now both fall under their holding company, now known as Meta. Another lesser-known example of a subsidiary is ESPN. A major company owns 80% of the ESPN company. What company is that? You know it as the Walt Disney Corporation.
Affiliate vs. Subsidiary: the Differences and Similarities
One similarity between these two companies is the purpose for which they are created. More often than not, companies and multinational corporations looking for direct investment in a foreign company will create a subsidiary or affiliate. What this does is it helps to prevent any negativity that may arise due to controversy or foreign ownership, and it helps companies to expand their reach to countries or target markets in which they may have struggled previously.
Another similarity is that, by definition, both terms are measurements of ownership for businesses, and they both to a type of relationship between companies. Aside from these two things, the majority of the similarities between affiliate and subsidiary companies lie in the advantages they bring both the parent company and themselves.
The main difference between the two is the number of shares the parent company owns - i.e., the level of ownership. To be an affiliate company, the holding company must only own a minority stake - less than 50%. To be a subsidiary, the holding company must own a majority stake in the business - more than 50%.
This leads to the second difference worth mentioning, the amount of control the holding company has. With affiliate companies, the holding company has little to no control, whereas with subsidiaries, the larger company has majority control over day-to-day business operations, and in general, their opinions are listened to.
There is a clear difference between an affiliate and a subsidiary company. If you’re thinking of giving up part of your business to another, you need to think about the amount you’re willing to let go of - not just in terms of shares but also in terms of control.
And suppose you’re thinking of investing in another business as a holding company. In that case, you need to consider the amount of resources you have available and the amount of involvement you’d like in the other company. Would you like to be actively involved in the daily processes, operations, and decision-making?
- When it comes to affiliate companies, the parent company owns the minority share (<50%).
- When it comes to subsidiary companies, the holding company owns the majority share in the business (>50%) and therefore has more control.
- Becoming an affiliate or subsidiary may offer a smaller company a lifeline in terms of resources. Whereas the larger parent company can look forward to increased efficiency, a possible tax deduction, risk diversification, and a more diversified portfolio.